Ukraine Hryvnia Defense Crumbles Amid Mayhem: East Europe Credit

Photographer: Vasily Maximov/AFP/Getty Images

A protestor throws a molotov cocktail at riot police in the centre of Kiev on January 22, 2014. Close

A protestor throws a molotov cocktail at riot police in the centre of Kiev on January 22, 2014.

Photographer: Vasily Maximov/AFP/Getty Images

A protestor throws a molotov cocktail at riot police in the centre of Kiev on January 22, 2014.

As anti-government protests rage on the streets of Kiev, the Ukrainian central bank’s resolve to defend its currency appears to be weakening.

The hryvnia has fallen every trading day but one this month and dropped to a four-year low of 8.45 per dollar yesterday even after the central bank spent half of its reserves since 2011 to prop it up. Derivatives show a 48 percent chance of the currency declining to a record by year-end, while the cost to insure the nation’s debt from default jumped the most in Europe this week.

The retreat is spurring speculation that central bank Governor Ihor Sorkin, who said Dec. 2 he would work to “keep balance and mitigate risks” in the currency market, is prepared the let the hryvnia depreciate. As the renewed violence in the nation’s capital claimed its first victims this week, foreign investors resumed selling the nation’s bonds even as last month’s $15 billion Russian bailout staved off a risk of a default this year.

“The sharp depreciation we have seen must be part of some concerted strategy to allow a weaker currency,” Timothy Ash, a London-based strategist at Standard Bank Group Ltd., wrote by e-mail yesterday. “It is going to go weaker, the only question is how much. It depends how bad the political protests get.”

Bullets, Grenades

Protests that started after President Viktor Yanukovych snubbed a cooperation agreement with the European Union in November, favoring closer ties with Russia, escalated into rallies attended by hundreds of thousands of people. Police crackdowns have fanned the anger of people manning barricades.

In the past three days police used rubber bullets, smoke bombs and stun grenades and deployed armored vehicles, as protesters hurled Molotov cocktails and threw rocks at officers. The U.S. said yesterday it would annul the visas of people linked to violence as two people died in street fights.

The clashes may further “weaken confidence” and increase demand for foreign currency, Paul Rawkins, a London-based director at Fitch Ratings, wrote in a report yesterday. The hryvnia dropped 2.3 percent this month and 2.3 percent in 2013, data compiled by Bloomberg show. It depreciated 0.7 percent to 8.435 per dollar at 11:39 a.m. in Kiev.

“Currency depreciation suggests that the authorities acknowledge that its previously overvalued rate was not defendable,” Gillian Edgeworth, chief economist for emerging Europe, Middle East and Africa at UniCredit SpA in London, wrote in an e-mailed report yesterday.

IMF Prescription

The International Monetary Fund has urged authorities in Kiev to increase the flexibility of the exchange rate to protect reserves and competitiveness, while streamlining public finances. Instead, the government has used the Russian aid to pledge increases in welfare payments and public wages.

Authorities are likely to try to limit depreciation to avoid the political cost of a potential run on the currency if Ukrainian households and businesses rush to exchange their hryvnia savings, Standard Bank’s Ash said. Three-month non-deliverable hryvnia forwards rose to 8.7250 today from 8.445 on Jan. 13, according to data compiled by Bloomberg.

“Retail foreign-currency demand, which is the fundamental fear driver, is continuing to put pressure on the exchange rate,” Dmitri Petrov, a London-based analyst at Nomura Holdings Inc., wrote by e-mail Jan. 21.

The 2014 budget envisages the hryvnia between 8 and 8.5 per dollar, First Deputy Finance Minister Anatoliy Myarkovskyi said yesterday. There is a 63 percent probability the currency will drop past 9 per dollar by Dec. 31 and an even chance it will plummet to a record 9.29, data compiled by Bloomberg show.

Increased ‘Presence’

Governor Sorkin said on Dec. 2. policy makers will “increase its presence” in the currency market. The bank “has not intervened” in the market this year, according to an e-mailed response to questions yesterday from its press office. The bank “has all abilities to support the hryvnia. The regulator is monitoring the situation all the time,” it said.

The yield on Ukrainian government bonds due 2023, which jumped to 10.8 percent before the Russian bailout, rose for a fourth day, increasing seven basis points to 9.05 percent today, the highest since Jan. 3. Dollar notes due 2020 issued by Egypt, which shares Ukraine’s Caa1 rating at Moody’s Investors Service, yielded 5.95 percent, the lowest in a year.

Resources for the central bank’s currency operations will be getting a boost as Russian aid continues to flow in. The government will sell $2 billion in notes to Russia and tap international markets this quarter, Myarkovskyi said in Kiev yesterday. Foreign reserves, which fell by 50 percent in two years to $18.8 billion by November, rebounded to $20.4 billion in December thanks to a $3 billion injection by Russia.

‘Desirable’ Depreciation

Ukraine’s current account, a measure of cross-border money flows, had a $5.7 billion shortfall in the third quarter, the widest since Bloomberg began tracking the data in 1998. The current account gap meant that Ukraine will face external imbalances even with Russian support, Vladimir Pantyushin, a Moscow-based economist at Barclays Plc, said by e-mail Jan. 21.

Credit-default swaps insuring Ukrainian debt against default jumped 38 basis points to 864 today, the highest in more than a month, according to CMA data.

“We think the authorities will allow greater currency flexibility to optimize the use of FX reserves and this involves a weaker hryvnia rate,” Barbara Nestor, a London-based strategist at Commerzbank AG, wrote in an e-mailed report yesterday. “We don’t expect sharp drop in the exchange rate as the Russian loan serves as a balance of payments support, but a weaker rate is desirable for the economy.”

To contact the reporter on this story: Andras Gergely in Budapest at

To contact the editor responsible for this story: Wojciech Moskwa at

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